Abstract:

The present study attempts to examine the riskiness of Islamic banks’ stock return when compared to that of market indices. Based on the Capital Asset Pricing Model (CAPM), the excess returns of individual Islamic bank’s stocks and that of market portfolio have been used for analysis. Moreover, the Fama-French (FF) three factor model has also been estimated incorporating both the size and value premium for stated stocks. Using the monthly stock prices of seven full-fledged Islamic banks for the period starting from July, 2014 to June, 2022, the paper aims to evaluate whether the stocks are defensive or aggressive than the market. The riskiness has been tested using both DSE broad index and DSE Shariah index as a measure of market portfolio returns. Findings suggest that stocks of each Islamic bank do behave differently; some are defensive, while others are as risky as the market with only one exception. Moreover, both CAPM and FF three factor model confirm that the Shariah based index outperform the conventional index in modeling the riskiness of stock returns. The results have been tested for
presence of heteroskedasticity and serial correlation to validate the models.